4.2 Contract Performance, Breach, and Enforceability

Contract Performance, Breach, and Enforceability

Once a contract is valid, the question becomes how it ends. The normal ending is performance — each party does what was promised, and the contract is discharged. But contracts can also end through agreement, impossibility, or breach, and the exam wants you to match the situation to the correct remedy.

Discharge of a contract

• Performance — both parties fully perform; the contract is executed.
• Mutual rescission — both parties agree to cancel and return to their pre-contract position.
• Novation — the parties substitute a new contract or a new party; the original obligation is extinguished. In an assumption with novation, the lender releases the original borrower.
• Assignment — one party transfers its rights to a third party. The assignor generally remains secondarily liable unless released, which is the key difference from novation.
• Impossibility / operation of law — destruction of the property, bankruptcy, or a change in law can discharge duties.

Trap: assignment transfers rights but the original party stays on the hook; novation substitutes and releases. If the exam says the original borrower is "no longer liable," it is describing novation.

Most purchase contracts are assignable unless the contract expressly forbids it or the duty is personal in nature. Listing agreements and buyer-representation agreements, by contrast, are personal-service contracts and generally cannot be assigned by the broker without the client's consent, because the client chose that particular agent. Watch for a question where a broker tries to hand a listing to another firm — that usually requires the seller's agreement, not a unilateral assignment.

Breach and remedies

A breach is the failure to perform without legal excuse. The non-breaching party chooses among remedies:

Because real estate is considered unique, money is often an inadequate remedy for a buyer, so courts will grant specific performance to compel the seller to convey. A seller, by contrast, can usually be made whole with money or by keeping the earnest money.

Time is of the essence and reasonable time

A "time is of the essence" clause makes every stated deadline a strict, material term. Missing a date is a breach. Without that clause, courts generally allow a reasonable time to perform. Expect a question where a buyer is one day late and the contract either does or does not contain the clause — the answer turns on that clause.

Distinguish a material breach from a minor breach. A material breach goes to the heart of the bargain and lets the injured party cancel and sue. A minor breach entitles the injured party only to damages for the small failure, not to cancel the whole contract. A buyer who fails to repaint a fence promised in a side note has committed a minor breach; a buyer who never produces the purchase money has committed a material one. The exam tests whether the failure defeats the essential purpose of the deal.

Worked example — liquidated damages math

A purchase contract states a price of $320,000 with $10,000 earnest money and a liquidated-damages clause naming the earnest money as the seller's sole remedy. The buyer defaults. The seller relists and eventually sells for $305,000, a $15,000 shortfall plus $2,000 in carrying costs.

How much may the seller recover from the defaulting buyer? Because the parties agreed to liquidated damages limited to the earnest money, the seller's recovery is capped at $10,000 — the deposit — not the $17,000 actual loss. The liquidated-damages clause is the ceiling. Had there been no such clause, the seller could pursue the full provable damages.

Trap: students add the shortfall and carrying costs to the deposit. With a liquidated-damages clause, the deposit is the agreed substitute for actual damages, not an add-on.

Remember the duty to mitigate. When a party breaches, the non-breaching party generally must take reasonable steps to limit the loss — a seller cannot let a property sit and then claim runaway damages. Punitive damages are rarely available for an ordinary contract breach; recovery is meant to make the injured party whole, not to punish. These principles explain why courts favor clear remedies like specific performance or an agreed liquidated sum over speculative damage claims.

Liquidated Damages, Earnest Money, and Worked Remedies

A liquidated-damages clause fixes in advance the amount one party keeps if the other defaults, avoiding a fight over actual loss. In most home contracts the seller's liquidated damages are the buyer's earnest money — but only if the contract says so. Courts enforce liquidated damages only when the amount is a reasonable pre-estimate of harm, not a punitive penalty.

Worked example: a buyer defaults on a $400,000 purchase with $8,000 (2%) in earnest money. If the contract names earnest money as the seller's sole liquidated-damages remedy, the seller keeps the $8,000 and the matter ends — the seller cannot also sue for additional losses. If instead the seller chose to keep all remedies open, the seller might sue for actual damages (e.g., a later resale $25,000 lower plus carrying costs), but cannot collect twice. Remedies are generally elective: a non-breaching seller picks liquidated damages, money damages, or rescission, not all three.